With so many misconceptions around trusts, it’s easy to understand the confusion about the benefits of a revocable living trust. A living trust (also called a revocable trust or revocable living trust) can be beneficial to a much broader group of Americans than most people expect.
During life, a living trust is essentially an extension of yourself (and a spouse if you decide on a joint trust). There are no tax benefits during life nor are there any adverse tax implications. However, at death, a living trust can provide two key benefits compared to owning assets not held in trust.
Before diving into a discussion on the benefits of living trusts, it’s important to first understand what happens to different types of assets after someone dies. Here’s a quick, high-level summary:
This article is a high-level overview of the various estate planning techniques and considerations when using revocable living trusts from the perspective of a wealth advisor (e.g. non-attorney).
The US has 50 states – each with their own tax laws and estate planning opportunities. Accordingly, working with an estate planning lawyer in your state is a must. For example, in addition to community property laws versus separate property states, not every state recognizes the same forms of ownership for jointly owned, non-trust assets.
Although there are typically numerous benefits of utilizing a revocable trust, these are the two most common advantages.
As with many things in finance, there are varying degrees of implications in going to probate court. There are plenty of ways this can go wrong, but in one of the more common worst-case scenarios, one spouse owns virtually all of the liquid assets (and/or a closely-held business) in their own name and passes away first. This can leave the survivor without funds to pay regular bills while the probate estate is settled. One of the benefits of a living trust is the ability to avoid probate for assets held in trust.
In addition, probate will incur often-avoidable expenses and attorney fees. Depending on the state and family situation, it can take months or years to sort out. And assets that go through probate court are public record, which can create a host of other issues. Finally, a large, messy probate estate can also be an emotional and logistical burden on the surviving spouse and family, who frequently act as the executor of the estate.
Is a trust the only way to avoid probate? Not necessarily. As mentioned above, a TOD/POD can avoid probate for bank and brokerage accounts, as well as joint ownership for other types of assets.
When assets go through probate, the court ultimately decides who gets what. It might end up aligning with your wishes, but it also might not. If the assets were held in a living trust, you could not only avoid probate (or reduce the probate estate), but also control the timing and distribution of the assets. And since trust documents aren’t part of the public record, all this can be done with discretion.
Here’s a simple example of how to put assets in a living trust:
You have a taxable brokerage account you own individually. You set up a living trust with an attorney and retitle the account in the name of your trust. When you die, the person you appoint as successor trustee will be legally responsible for distributing the assets in the living trust according to the terms you’ve specified in the trust document.
What are common terms of a trust?
It depends on the individual or couple’s goals, but typically, spouses arrange for varying levels of access during the surviving partner’s lifetime with the remainder to children or relatives. (Limiting access can provide estate tax planning benefits for some). Individuals might also decide (at the death of the first and/or second spouse) to leave assets or money to other family – aging parents, children from a different relationship, relatives, friends, charity, etc.
A trust can also help safeguard assets for minor children, provide for individuals with special needs, include terms if the survivor remarries, and also identify a successor trustee in the event of your disability, among other things. In contrast, if assets go to a spouse or heirs outright, these protections are lost.
Your whole estate plan should be kept up to date and reflect your current circumstances and goals. A trust is just one part of an estate plan. People often wonder whether they need a trust or a will; often it’s both, as a trust cannot replace a will. Depending on your financial situation, legacy goals, and specific planning needs, a trust might only be one tool in your estate planning toolbox. Consider consulting an attorney to understand what structure might be the most beneficial for your objectives.
The information contained on this website is presented for informational and marketing purposes only and is not to be understood as legal advice. You should consult an attorney for advice respecting your individual needs. Renee E. Nesbit, Attorney at Law looks forward to speaking with you about your particular needs. Please note, however, that the mere act of contacting our firm does not create an attorney-client relationship. As a result, you should never send any confidential information to our office until a Representation Agreement has been signed by both you and Renee E. Nesbit, Attorney at Law.